Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Markets: A journey to the past! - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Mar 28, 2006

    Markets: A journey to the past!

    Are the Indian stock markets over valued? Is there any upside left? Can the phenomenal rise in the stock market over the last three years sustain? With the indices making new highs every other day, these are the questions that often cloud the minds of the investor. In this article, we shall give a historical perspective of the Indian stock market and what lies ahead?.

    For the purpose of the article, we have collated data for around 2,500 companies (see graphs below). If history is of relevance, the charts do indicate that we have come a long way with the market capitalisation moving into new highs. The combined market capitalisation of the 2,500 companies has grown at a CAGR of 74% in the last three years. In the same period, the CAGR in sales and net profits of these 2,500 companies was 17% and 36% respectively.

    There are many reasons for the sharp rise in market capitalisation in the last three years.

    1. The corporate sector has been through a very extensive restructuring phase, which includes shedding excess employees and pruning overheads. Part of the cash flow generated from this restructuring exercise was utilised towards retiring high cost debts. The fact that interest rates declined sharply in the last ten years also helped matters.

    2. The restructuring was accompanied by economic recovery towards the early 2000, which had a positive impact on the asset utilisation factor. Consequently, with costs under control, the benefits of incremental sales accrued at the bottomline level. This is clearly reflected from the reduced gap between operating margins and net margins in the last ten years (see adjacent chart).

    Going forward, while competition is expected to intensify further, interest rates seem to have bottomed out. And this is the phenomenon across the globe. All the developed nations have witnessed a sharp rise in interest rates in the last two years (though on a lower base). Though demand prospects are promising, in our view, India Inc. has entered the capital expenditure phase (like in the mid 1990s). While this is a positive in the long-term, we believe that profitability is likely to remain under pressure in the medium-term i.e. the capacity expansion is likely start contributing to growth only after two years. Meanwhile, corporates will have to bear higher depreciation and interest charges.

    To conclude...
    While we continue to remain positive on the 'India Story' in the long run, we do not subscribe to the view that the momentum in the Indian stock market will sustain for ever (there are pockets of insanity in valuations). At the current juncture, Indian stocks are no more 'value buys'. As Warren Buffet once said, 'Price is what you pay and value is what you get'. To that extent, we must exercise caution in our stock selection.



    Equitymaster requests your view! Post a comment on "Markets: A journey to the past!". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Why NOW Is the WORST Time for Index Investing (The 5 Minute Wrapup)

    Aug 18, 2017

    Buying the index now will hardly help make money in stocks even in ten years.

    Trump Takes a Beating (Vivek Kaul's Diary)

    Aug 18, 2017

    Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process) (The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 18, 2017 (Close)